What is Loan-to-Value?

Loan-to-value (LTV) is the measure of a home’s mortgage balance to its market value, expressed as a percentage.

A Longer Definition: Loan-to-Value

Loan-to-value, often abbreviated as LTV, is a ratio that describes how much is owed on a home compared to what the home is worth. Along with credit scores and debt-to-income, loan-to-value is one of the three major components of a strong mortgage approval.

Loan-to-value is the opposite of how much equity a home buyer has in their home.

For example, when a first-time home buyer uses a no-downpayment mortgage to buy a home, that home buyer has 0% equity in their home. Therefore, the home’s LTV is 100 percent.

When a home buyer makes a three-percent equity down payment, the home’s LTV is 97%.

Loan-to-value generally does not affect mortgage rates and terms, except with standard conventional mortgages. A conventional mortgage with a high LTV is subject to higher interest rates and private mortgage insurance.

Conventional mortgage guidelines also restrict LTV based on specific loan traits:

• Purchase or refinance transaction
• 1-unit home or multi-unit home
• Main residence, second home, or investment property
• Standard or home affordability mortgage
• Standard or high-balance mortgage loan limits

FHA, VA, and USDA loans do not change rates based on LTV.

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Maximum LTV, Common Mortgage Types

Loan-to-Value: A Real World Example

Imagine a first-time home buyer using a 97% loan-to-value (LTV) conventional mortgage to buy their first home. Because the loan’s LTV exceeds eighty percent, the home buyer is required to pay private mortgage insurance (PMI), which increases their monthly mortgage payment by a small but meaningful amount.

The mortgage lender tells the buyer that PMI is required until the loan-to-value ratio reaches 80 percent, based on conventional mortgage rules. They estimate this will be achieved in fewer than 3 years, due to home appreciation and regular monthly payments.

Each month, the home buyer monitors their mortgage balance alongside the home’s current market value. After two years and several months, the balance has decreased, the home’s value has increased, and the home buyer’s loan-to-value ratio falls below 80 percent.

The home buyer contacts their lender to request the removal of mortgage insurance. The lender reviews the loan-to-value ratio, verifies the borrower’s eligibility, then cancels the PMI.

Common Questions About Loan-to-Value

What is a good loan-to-value ratio?

There are no good or bad loan-to-value ratios. Loan-to-value is only one factor in a mortgage approval. In general, a lower LTV reduces a lender’s loan risk.

Can I get a mortgage with a high loan-to-value ratio?

Yes, you can get a mortgage with a high loan-to-value. Some mortgage programs are 100% LTV as a feature, including USDA mortgages and VA mortgages. Conventional mortgages allow up to 97% LTV. The FHA mortgage program is 96.5% LTV.

Will my loan-to-value go down after I buy a home?

Generally, a home buyer’s LTV decreases after purchase because the buyer makes regular mortgage payments, which reduces the principal balance. LTV also decreases as the home’s value increases. Should a home’s value decrease, its LTV can rise.

How do I calculate my loan-to-value?

Calculate loan-to-value by dividing the mortgage loan amount by the property’s value, then multiply by 100 to get a percentage.